Linkedin Stock Surge: Scam?

Reid Hoffman, founding CEO and now Chairman of Linkedin, is happy; but should he be happier?

Linkedin was the stock du jour last week when it became the first social network to release an IPO. Its shares, first priced at $45 on Thursday, reached as high as $120.70 before closing Friday at $93.09. In early trading this morning, the shares took another 9 percent hit, selling for just $84.

Unless Linkedin was scammed by the companies that underwrote the deal.

By selling the stock to their favored clients at $45, then watching it soar to $90, they earned those clients $175 million, which would otherwise have gone to Linkedin itself. According to Eric Tilenius, general manager of Zynga: “A huge opening-day pop is not a sign of a successful I.P.O., but rather a massively mispriced one.” He’s one to know, as many people are eagerly awaiting Zynga’s own IPO.

Henry Blodget writes that it is common for underwriters to value the stock slightly below its value, but that means 10 to 15 percent, not 50 percent. That leaves only two options when trying to understand the unprecedented surge: Either the fabled Titans of Wall Street—Merrill Lynch, Morgan Stanley, and Bank of America—had no idea what they were doing when they valued the initial stock, or they knew exactly what they were doing. In the latter case it means that they chose to stiff Linkedin to benefit their clients.

Finally, he points out that even the greatest minds on Wall Street had no basis on which to evaluate the stock in the first place. “Let me make this perfectly clear,” he writes. “Investment banks do not set the ultimate price for IPOs; the market does” He lets us in on what he calls “a little secret: Morgan Stanley and Bank of America Merrill Lynch think people who bought LinkedIn shares at $90 or more are nuts.”